ECB-Italian Bond News May Be Market Game Changer

Game changer? Reports that the ECB may be on the verge of a deal with Italy to buy Italian bonds in exchange for a balanced budget amendment, and labor, welfare and infrastructure reform, have reversed the markets, with a 40-point move in the S&P 500 in little more than an hour.

Volume has been titanic all day and been even stronger in the last hour and a half: at 1:30pm ET, NYSE consolidated volume is over 5 billion shares. We have the potential to do 8 billion, a number we have not seen since May of 2010.

This agreement, if correct, is very different from expanding the European Financial Stability Fund (EFSF), which was designed to issue bonds to raise funds to provide loans to eurozone countries. Now, we are talking about the ECB creating funds to buy the debt — either by getting it from some source (Germany) or by fiat printing. (Sovereign Credit-Default Swaps at a Glance)

QE1 (quantitative easing) for Europe, essentially.

Can Europe pull together and craft a comon solution? So far, the jury is out. But if these reports if true, it is certainly a big step.

Are we in, or out? It's time to decide for Europe. A monetary union with no fiscal union is not working. What about "Pan-European" bonds? That seems tougher, but the fact that some are discussing it indicates that Europe has reached a critical point of deciding how "in" or "out" they want to be.

Next up: the Fed meeting next week. Traders, for the most part, believe the Fed is unlikely to make statements supportive of QE3. There is no "game changing" solution the Fed can offer for the U.S. issues. This doesn't mean there are no bullets left.